The Art of Trade War
"Commerce with all nations, Alliance with none, should be our motto"
-Thomas Jefferson
I made my buys for the year on December 28, 2017, see the new portfolio here (Click Here).
I've been asked repeatedly to say something about the Trade War of 2018. I've resisted, mainly because I didn't think it matters much to the Mother's Little Helper portfolio. I've also resisted because, frankly, there's no upside for me in this. No matter what my position is I'll get a few hundred flame mails from one faction or another.
I'm giving in to my readers request that I comment, this is a really long comment and one that must be understood from the way I look at the markets and politics. To understand this post requires an understanding of me. For this I provide some background below.
Thesis
Balanced fair trade is not the goal, it’s the deception
The trade war will be short lived, but longer than anyone really wants
At stake is global economic power for the next century
Background
This article is going to move around a lot. Think of it like a Bond movie where Bond, James...Bond, chases the villain across several countries before pinning him down and forcing the truth out. Grab some popcorn and a soda and enjoy the ride. Like a Bond movie you may need to suspend your disbelief at times, step out of your own politics, religion and ideology to allow events and the data to tell a story. I don’t have a Q to give me cool gadgets but my willingness to step away from my own emotions is what I feel provides me with my cool gadget edge over my nemesis; namely the global markets. I tend to be a contrarian investor, which simply means I like to invest in areas that the rest of the market hates; read as, my views may not align with yours and that doesn’t make either of us wrong.
A substantial number of new readers have joined this blog and so for the benefit of those that haven’t read any of my posts I’ll simply restate a few things about myself that may be helpful. I don’t belong to a political party or support any specific politicians; not even a yard sign, I still believe that my vote is private. I haven’t support Clinton or Trump, but I do support the idea of a non-partisan debate platform that brings in a third party or two. I don’t belong to a church or espouse any particular religious beliefs, but I do believe in the Law of Attraction. I read about 25 blogs with significantly different points of view. I listen to CNBC (US, China, Australia and European reports), MSNBC, CNN, Bloomberg, Fox and NPR news, The Good News Network, Twitter and Facebook, the Wall Street Journal, and most articles on CNBC and AP news. I also read a lot of books, typically on subjects I don’t know much about and historical figures. Being a news and book junkie forces me to dig deeper on esoteric issues like, what’s the International Maritime Organization up to? What are the latest developments in Immunotherapy and human implanted micro-chips? My news consumption takes up about 4-5 hours of the day; it’s like a second job while I’m doing my job but I’ve found that the more I consume, the less stressed I am about world events. The science behind that personal discovery was revealed to me in the book The Elements of Journalism 3rd edition, I highly recommend the book. I don’t claim to be without bias, but I’m comfortable that I’m not freaked out by any particular event. It’s never my intention to convert, offend or provoke anyone, I’m far more interested in the exchange of ideas.
We can howl at the moon on Twitter and Facebook,
Or we can use our talents to make a small dent in the Universe.
Honor your talents, make that difference.
-Clay Baker
Myths
I can’t objectively look at trade wars if I accept as fact all the sound bites that fill the news about trade wars. Besides, in contrarian investing you go to where the crowd isn’t. My own experience has been that when everyone is shouting the same message, more often than not, they’re wrong.
The trade wars we’re having today have a lot of moving parts, but I think the objective lies out in the fog, we don’t see it yet because we’re not conditioned to think long term. Why do we call someone a ‘Visionary’ who looks out 10-20 years, I would say that’s simply being thoughtful and pragmatic.
The headlines around trade wars sound like this; “no one wins”, “trade wars are easy to win”, “look at what happened with the Smoot-Hawley Act, it caused the Great Depression”. I have to squash that one right now. Even free trade economist Milton Friedman thought Smoot-Hawley had little to do with the Great Depression. The Great Depression started on October 29, 1929 when the stock market crashed. Smoot-Hawley didn’t get passed until June 1930 and was being debated long before. To compare today’s trade wars to the Smoot-Hawley Tariff Act of 1930 is to completely misunderstand the events of today and yesterday. Trade in 1930 was only 9% of U.S. GDP, so how Smoot-Hawley could have caused the Great Depression is hard to support. Furthermore, the data simply doesn’t show that Smoot-Hawley extended or exacerbated the Great Depression either. Total imports at that time were on a long term decline; even after the 1934 Tariff Act that ended Smoot-Hawley, total imports continued to decline. Maybe protectionism was a result of the Great Depression, not the cause.
The great myth is that we know all about trade wars and how they will ultimately work out because our experience with tariffs and trade wars in the past was negative or felt negative. I suspect that Og, the first human who tried to harness fire burned his fingers. What if Og had said to his wife Ug, “I burned my fingers, if you touch that you’ll burn your fingers too, stay away, stay very far away, fire is dangerous and can never be good.” There are many dangerous things that when used properly can had positive results, but when used improperly can have disastrous results. I’m pretty confident that what really happened is Og burned down the cave and Ug his devoted wife cleaned up the mess, found a useful purpose for fire and sent him off to a safe place to do no harm; his ‘Man Cave’.
Another myth is ‘All trade is good’. This one needs a disclaimer every time it gets repeated. In the early 1990’s flat panel displays, a U.S invention, were dumped at below cost prices on the U.S market. Even with high tariffs, flat panel displays are predominantly made in Taiwan. Consumers got lower prices, but at what cost. There are many examples of trade that’s not good, so while I believe in free and open markets, let’s recognize when trade is being used to intentionally destroy competition in order to monopolize an industry.
Global Synchronized Growth
In the 4th quarter of 2017 most economist agreed that Global Synchronized Growth was in fact underway. This may be the first time many investors have ever experienced Global Synchronized Growth, a term first identified in the early 1970’s just before the OPEC oil embargo and last heard just prior to The Great Recession in 2008. Around the world in 2017, revenue and earnings had grown year-over-year and analysts were projecting that the future was even more optimistic. Worldwide manufacturing was up, U.S. exports were up, bolstered by a weaker dollar, optimism from corporate CEO’s was up and small business optimism was at its highest levels since 2014. In late 2017 Deutsche Bank’s chief international economist commented that “global economic health had never been more robust....We have never seen a smaller number of countries in recession.” Data supporting the global synchronized growth story flowed from all directions and not a single developed nation was in contraction. The world economy looked so good that headlines about “Is This a Bubble” began to dominate the news. In fact 2017 was one of the easiest years on record to make a profit in the stock market.
When 2017 third quarter earnings reports came in, 75% of U.S. S&P 500 companies reporting had delivered earnings per share in excess of their 5 year averages. Looking at Europe, 65% of MSCI Index companies had beaten their third quarter expectations. This was real, growth was being driven from all sectors by revenues and real earnings. The conviction test, the DOW Jones transportation index showed that the transports were up; bull markets don’t last without the transports. The tax cuts were still in the Senate and hadn’t entered into the U.S. economic picture yet, but investors were clearly hopeful the tax cuts would pass as indicated by the share volumes trading around any news on the cuts. The stories of the day were focusing on who the big winners would be based on effective tax rates and overseas cash hoards. My own analysis found that Cigna Insurance would see over a 50% drop in their effective tax rate if corporate rates dropped to 21%. Cigna stock climbed to $226 a share by January 2018 in anticipation. Today Cigna trades at only $177 because that 50% reduction in taxes hasn’t been priced into the stock; expect about a 20-25% increase in share price when this occurs. Apple would be able to bring home $250 Billion dollars in cash at a greatly reduced rate due to the repatriation clause of the tax cuts. Every publicly traded company will have to be repriced to account for the compression of price/earnings ratios as a result of tax cuts and newly available investable cash. As I write this on July 19, 2018, those tax cuts, repatriation and the impacts of lower taxes are not fully realized in stock prices. My guess is we are still 1-2 years away from seeing all the impacts of the tax cuts and repatriation of cash as it will take that long for corporations to figure out how to implement the new tax code in their business and how they want to use the cash they bring home.
In a nut shell, the U.S. economy is strong and doing well. When the tax cuts and repatriation of overseas cash kicks in we’ll be doing even better. In fact, I anticipate that the job market will become so tight that immigration reform will become the single most important factor that enables the U.S. economy to continue growing.
Understanding the Trade War
The fervor over tariff’s, trade wars and the many potential impacts on our economy are fascinating to me. The surface of these issues is revealed in headlines and if all you do is look at the surface what you see is pretty scary. I don’t discount that all this makes for great TV and Radio, however our focus should be on how any of this will impact our businesses, income, savings and investments. If your own interest in the trade wars is connected to a social or political agenda I would stop reading right here; I don’t have one to share or promote, I simply want to understand how these events will impact the economy and investing for our future.
First, we can’t discuss tariffs and trade wars without discussing President Trump, President Xi Jingping, Vladimir Putin, Angela Merkel and possibly the rest of the global leaders that are in Trump’s cross-hairs. One way to understand people you don’t know is to look at what they read and which books they recommend to others. Since I can’t stroll into Mara Lago or The White House to see what the President is reading I had to put together a list from reliable sources. One book stands out because we can see evidence of it in many events, The Art of War by Sun Tzu, a 2000 year old Chinese text on military strategy. Angela Merkel’s book list can be compressed down to one text Transformation of the World by historian Jurgen Osterhammel. I’ll save you the 1,500 page read by saying, we can detect his influence in Merkel’s worldview, particularly where he covers globalization, migration and technology. Xi Jingping’s book list is as extensive as his use of quotes from literary favorites. For our purposes these two books stand out – Pedro Domingo’s The Master Algorithm and Brett King’s Augmented: Life in the Smart Lane. Xi is betting huge on artificial intelligence as a means of social control as well as a driver to the kind of innovation economy that he is promoting. Having been voted to a life term one has to acknowledge that he has the full support of the Communist Party. China plans to invest $100 billion over the next five years to develop AI technology hoping to put its giant corporations; Baidu, Tencent, Huawei and Alibaba in the global driver’s seat.
I can keep playing this parlor game with leaders from all over the globe and the result is the same; the current crop of political leaders are consumed with defining their nations place in a future that will be dominated by technologies that will have the most profound impacts in human history. Geopolitics today is like a game of musical chairs where the rules have not been established. Every nation is scrambling to figure out which side they want to be on. Only two nations have the ability to be the global leader, the U.S. and China; this means that everyone else has to choose alliances or try to go it alone and remain neutral.
Listening to the people who know Trump best is confusing because constantly I find statements supporting Trump as a free trade bull. His international business dealings over the decades would suggest that he’s not opposed to trade, so why all the protectionism with Tariffs and a trade war? Looking back at The Art of War, by Sun Tzu may provide some insight. Sun Tzu taught that the central importance in war is deception. “Even though you are competent, appear incompetent. One with great skill appears inept,” Sun Tzu advised. “Wear them down by fight, foster disharmony, use their anger and pride against them.” We all remember Trump’s midnight tweets: “little rocket man,” “this maniac,” “much bigger button” and so on. While it would be easy, and far more gratifying to just dismiss Trump as a lunatic who has lost his mind on the world stage; I’m forced to consider all contrarian views. So I’m considering here that Trumps actions are tactics and in fact we see the same tactics with his actions at the WTO meeting, his attacks on the Canadian Prime Minister Justin Trudeau, attacks via twitter on Mexico, NATO, the EU, Germany and many more. All Warfare is based on deception. This was one of Sun Tzu’s most important teachings and one that I think is being used extensively in the trade war of 2018. I think most of Trumps’ actions and rhetoric is, at least in his mind a tactic to foster disharmony and wear down his opponents.
We live in a world that is governed by treaties and trade acts where disputes have been refereed at a glacial pace by the World Trade Organization. The alliances forged after World War II were created to protect Europe, namely from Russia and as the world slipped into the Cold War era NATOI became more important. China sees the opportunity in those alliances. Trump can’t function in that world, so following Sun Tzu’s advice, he throws a metaphorical grenade into every meeting, disrupts the natural order and then immediately begins to build new alliances in the way he wants them. The U.S. being aligned with Russia isn’t something China or the rest of the world ever considered. China rising out of emerging market status to become a member of the WTO isn’t something we expected either. But when China started pitching their 2025 plan of One Belt-One Road they expected the U.S. to go on as we always have with statements and negotiations delivered via the WTO. The world thought that bringing China into the WTO would appease China and bring them in line; all it did was strengthen their position. What China didn’t plan on was a U.S President who behaves like a junk yard dog.
Understanding Trade War Economics
A tariff is essentially a tax on trade flows in order to balance the input costs of the goods. As we saw with flat panel displays those tariffs don’t always work unless there is also robust support for the home industry. If a company in China can produce a widget at a lower cost than and equivalent company can in the U.S, the U.S is likely to apply some amount of tariff on that class of products in order to level the playing field for producers in the U.S. We’ve always had tariffs of varying degrees as a means to protect companies and workers in the U.S. Likewise countries around the world have placed tariffs on our goods. A handful of nations have zero tariffs or zero tariff relationships with specific countries. According to the WTO list of highest and lowest tariff nations, less developed nations tend to have the highest tariffs while more developed countries have lower tariffs. That’s the macro picture, but when we look closer we see that Japan, a country with relatively low tariffs has very high tariffs on rice. Likewise the U.S places high tariffs on peanut products to protect our peanut farmers. The line items are where some seemingly unusual policies appear.
Looking at the macro numbers the 2018 trade war gains some perspective.
Global Economy: $80 Trillion
United States Economy: $20 Trillion
China Economy: $12 Trillion
Current Tariffs US: $250 Billion or .0125% of US GDP
Current Tariffs China: $34 Billion or .002% of China GDP
United States Population: 326 million
China Population: 1.4 billion
Goods Imported by US: $506 Billion
Goods Imported by China: $130 Billion
Trade Imbalance: $376 Billion
I think looking at the big picture shows that the cost to either nation is really not all that great from an economic standpoint. The .0125% of GDP that $250 Billion reflects is not going to have a meaningful impact on the U.S economy or global GDP. However, when we look at line item tariffs and zoom in on the micro impacts, yes, someone will get hurt or at least feel the impact of a tariff. If you’re buying a 2018 Harley Davidson with a cost right around $25,000, will you be deterred by a price tag of $27,500? Probably not, but if your dried fruit goes up .50 cents you’ll likely switch brands.
The economics of this trade war are not going to have a meaningful impact, what’s more important in are the tactics; why have the war at all if the economics don’t matter? A look at the size of the imbalance and relating that to China’s One Belt-One Road Initiative is important. Notably that China will run out of tariffs before the US does since we imported over $500 billion in goods and China only imported $130 billion from the US. For anyone who thinks tariffs are a weaponized form of diplomacy, look closer at the China tariff list and you’ll find that its tariff weapon is full of blanks as they put tariffs on trade flows that don’t exist.
For instance China included a tariff on Piped Natural Gas from the US. I checked, we don’t have a pipeline from the US to China. Live Trout, a product the US hasn’t imported from China since 1992 somehow made it on the list. The US did the same when we included Liquefied Natural Gas LNG which we don’t ship to China, but in two years China will be in desperate need of all the LNG it can get. The U.S has recently started shipping LNG, just not to China. China is the world’s second biggest importer of LNG and it doesn’t have any liquefaction plants capable of exporting the fuel. One of my favorites is a tariff on imported radio tape players from China which according to the US Census Bureau trade data hasn’t been imported since 2006. Honestly, someone in 2006 was buying a tape player for their car? Also, that trans-pacific power line that doesn’t exist will be receiving a hefty tariff for Chinese electrical power imports. This is literally a tariff on electricity being imported to China, from the U.S.; we can only assume from a secret under-sea transmission line.
My point is, keep this all in perspective. The stories we hear on the news are all about the extreme and the salacious. The numbers sound big, but they aren’t. The rhetoric sounds expensive, but talk is cheap. The soybean farmer who can’t make ends meet because of tariffs sound horrible; I’d like to look at his books and see if that’s the real cause of his decline or the excuse. The wine maker, widget producer and grain growers that suddenly have cancelled orders hurts. The motorcycle company that is moving ‘some’ manufacturing overseas because of tariffs I’m certain was making those plans long before any discussion of tariffs took place. Yes individuals will feel some pain from these tariffs; we subsidize all kinds of industries, farmers in particular, certainly a solution can be found to alleviate that problem.
This is High Stakes Poker
So why all the phony tariffs mixed in with the real ones? Donald Trump and Xi Jingping sat down at a metaphorical poker table with their respective piles of chips. Odds are in favor that the poker player with more than $500 Billion in chips can out last the player with $130 billion. We are seeing this right now as the last reaction from Trump to Xi was serious enough that we are still waiting on a response from Xi. Xi tells the U.S openly that he sees us as weak, a mistake many nations have made over the last 200 years; so here’s his next anti:
“In the West you have the notion that if somebody hits you on the left cheek,
you turn the other cheek, In our culture, we punch back.”
Trump responded back that he’s willing to go to the nuclear option with tariffs to bring China in line. Trump has more chips on the table, at some point Xi has to flop his cards and find a way to move forward with a plan B. In the background we also see the undercurrent of personalities and public perceptions as one player is willing to go forward regardless of what anyone thinks, does or says about him. The other player just got elected to a life term because he’s promised over 1.4 billion people that he will make his country the greatest economy on earth by 2025. The object has to be to keep playing the game so that neither a stand-off nor a total loss is ever the result.
As I’m writing this economic advisor Larry Kudlow has stated that “The ball is in Chinas court”. The U.S. is waiting on China’s response to the last threat from Trump. For the first time in about 25 years, China’s negotiating position appears to be in question; China blinked.
Balanced and fair trade is not the goal, it’s the deception
I think to really understand the trade war we have to seriously step out of our own ideologies and ask a simple question, “What’s The End Game”?
To answer that question we have to consider that whatever is at stake must be worth more than the $376 Billion trade deficit; I would propose that the goal must be worth more than the $500 Billion in trade. Trump spends a lot of time talking about U.S. manufacturing, there’s a possible growth sector for America. Think nothing is made in the USA, think again, manufacturing is the largest sector in America’s economy producing over $6 Trillion dollars in output. But the potential from whatever marginal growth we could get just doesn’t seem likely. This can’t be about coal or oil drilling, or any of the other notions about bringing back the old industries; they simply don’t contain enough economic fuel to maintain the U.S.’s position as the global economic leader.
Let’s look to the future where technology is our new industrial sector and seriously consider what is at stake. About a decade ago China shifted its focus from agriculture to technology. Prior to about 2008 China focused heavily on protecting its agricultural supplies, today it’s all about technology. China had to make the shift because eventually you can’t grow a country if all your attention is on feeding the people. Through a series of steps designed to keep the communist party in charge while sewing some seeds of capitalism and encouraging some entrepreneurship, China has transformed itself. No longer an emerging market, China has become a player in world economics and in just a decade has reached a point where there are serious discussions taking place about whether or not the Yuan will supplant the dollar as the preferred currency of foreign exchange. This is where an understanding of the international bond market helps. The overly simplified version is that when the dollar is strong it becomes more expensive to use the dollar to hedge or protect investments in bonds and stocks. If the dollar becomes too expensive investors will use another currency and possibly buy bonds in that country as well to keep everything liquid. China has kept their currency value low while also offering up more and more bonds to fuel their expansion. China is working feverously on their “Belt and Road Initiative” spending roughly $900 Billion per year for the next decade on infrastructure projects. Some estimates list the Belt and Road Initiative as one of the largest infrastructure and investment projects in history, covering more than 68 countries, including 65% of the world's population and 40% of the global GDP as of 2017. To put it all in perspective, the immense infrastructure project will use more concrete than all pre-existing infrastructure projects on the planet. So what is Belt and Road?
Belt and Road Initiative
The Belt and Road Initiative (BRI) or the Silk Road Economic Belt and the 21st-century Maritime Silk Road is a development strategy proposed by the Chinese government which focuses on connectivity and cooperation between Eurasia, primarily the People's Republic of China (PRC), the land-based Silk Road Economic Belt (SREB) encompassing some 60 countries and the ocean-going Maritime Silk Road (MSR).
One Belt-One Road is a collection of initiatives that link together land trade routes, maritime trade routes and Ice Trade routes.
The land corridors include:
The New Eurasian Land Bridge runs from Western China to Western Russia through Kazakhstan, and includes the Silk Road Railway through China’s Xinjiang Autonomous Region, Kazakhstan, Russia, Belarus, Poland and Germany. The China–Mongolia–Russia Corridor will run from Northern China to Eastern Russia. The China–Central Asia–West Asia Corridor will run from Western China to Turkey. The China–Indochina Peninsula Corridor will run from Southern China to Singapore. The Bangladesh-China-India-Myanmar (BCIM) Economic Corridor, runs from southern China to Myanmar and is officially classified as "closely related to the Belt and Road Initiative". The China–Pakistan Economic Corridor also known by the acronym CPEC, also classified as "closely related to the Belt and Road Initiative," which is a US$62 billion collection of infrastructure projects throughout Pakistan that aims to rapidly modernize Pakistan's transportation networks, energy infrastructure, and economy. On November 13, 2016, CPEC became partly operational when Chinese cargo was transported overland to Gwadar Port for onward maritime shipment to Africa and West Asia.
The marine corridors include:
The Maritime Silk Road, also known as the "21st Century Maritime Silk Road" is a complementary initiative aimed at investing and fostering collaboration in Southeast Asia, Oceania, and North Africa, through several contiguous bodies of water: the South China Sea, the South Pacific Ocean, and the wider Indian Ocean area.
The Maritime Silk Road initiative was first proposed by Xi Jinping during a speech to the Indonesian Parliament in October 2013. Like its sister initiative the Silk Road Economic Belt, most countries in this area have joined the China-led Asian Infrastructure Investment Bank.
The Ice Silk Road:
In addition to the Maritime Silk Road, Xi Jinping also urged the close cooperation between Russia and China to carry out the Northern Sea Route cooperation to realize an "Ice Silk Road" to foster the development in the Arctic region. China COSCO Shipping Corp. has completed several trial trips on Arctic shipping routes, the Transport departments from both countries are constantly improving policies and laws related to development in the Arctic, and Chinese and Russian companies are seeking cooperation on oil and gas exploration in the area and to advance comprehensive collaboration on infrastructure construction, tourism and scientific expeditions.
In 2014 China signed an agreement with Kenya to create the Mombasa–Nairobi Standard Gauge Railway connecting Mombasa to Nairobi.
In 2015 China signed a strategic, cooperative memorandum of understanding with General Electric. The memorandum of understanding set goals to build wind turbines, to promote clean energy programs and to increase the number of energy consumers in sub-Saharan Africa.
In 2016 in his 2016 policy address, Hong Kong chief executive CY Leung's announced his intention of setting up a Maritime Authority aimed at strengthening Hong Kong’s maritime logistics in line with Beijing's economic policy. Leung mentioned "One Belt, One Road" no fewer than 48 times during the policy address.
Okay, so China is going ‘all-in’ in this poker game and investing all over the world, but what could be big enough, valuable enough to drive a nation to plunge itself into massive debt, trade wars, possibly real kinetic type wars and face possible economic ruin? I’m talking about China by the way. Technology, specifically these technologies.
The biggest future growth areas in technology by 2025 are:
artificial intelligence $3.5 - $5.8 Trillion
Advanced healthcare (Immunotherapy, etc) $145 Billion
autonomous vehicles and aircraft $125 Billion
virtual reality $19 Billion
deep learning and machine learning $10-$11 Billion
No matter how you slice it, those five categories are big, in fact I think the bottom four are under estimated, but given the risks they’re not big enough. According to HIS Markit data,
5G is expected to enable $12.3 trillion of global economic value in less than 20 years.
That’s one hell of a big pile of poker chips. What’s even more important is how reliant all of those other technologies are on 5G communications. Win at 5G and you win the whole pot.
Internet 3.0
When the internet began the first obstacles to overcome were the development of standards and protocols by which information would travel from one computer to another. The same is true of the mobile internet and 5G; think of this are internet 3.0. We’re all familiar with our old cell phones that used 3G, remember how fast we thought they were? Then came 4G, Wi-Fi and LTE, we couldn’t live without these fabulous high speed connections on our mobile devices. 5G isn’t just faster, it’s a whole new level of communication architecture that will require new standards, new equipment, new chip sets and much more. Downloading songs faster or streaming a movie without interruptions is a wonderful thing to look forward to, but an autonomous car simply isn’t practical without 5G communications. In December 2017 3GPP, the organization that governs cellular standards adopted the first specification for 5G. With a standard it’s now up to the carriers and hardware makers to build out the network.
Consider the recent events with the failed merger between Broadcom and Qualcomm. Qualcomm is a 5G chip maker, a merger between these companies, even with Broadcom moving its headquarters to the U.S, was thought to be a risk to national security. The $1 billion dollar fine with a $400 million dollar escrow account and a complete replacement of the board and executive management with onsite U.S. oversight at Chinese equipment maker ZTE highlights the importance the Trump administration has placed on 5G. Many argue the fine isn’t large enough. When the U.S banned ZTE the company was literally facing bankruptcy and the Chinese government intervened and quickly brought ZTE in line with U.S demands. Most important for the U.S, we have people ‘monitoring’ ZTE. ZTE was a single hand in the poker game.
As the 5G standard has been developing we’ve seen a wave of mergers and acquisitions within the telecommunications and entertainment industries. While this may look like anti-competitive behavior to regulators and consumers, I would suggest that the regulators take their foot off the brake and let these companies quickly merge assets and get on with the work that has to be done; namely pool resources to be able to buy up spectrum to be the world leaders in 5G communications.
Tech billionaire Elon Musk took a decidedly different route, changed the rules and through his SpaceX corporation launched the first satellite as part of his StarLink Internet Project. StarLink is a network of low-earth orbit satellites that will deliver 5G speed anywhere on earth. Needless to say, the 15 million Americans currently without internet access will love this but so will every industry on spaceship Earth that needs 5G anywhere and everywhere.
Consider the value of a 5G communications network that blankets the globe with minimal ground based infrastructure. The cost savings alone are unbelievable. Consider what this network would mean to air traffic control, shipping, autonomous vehicles, agriculture, fishing, retail, distribution networks, entertainment, business communications, healthcare, military and more. With trillions of dollars at stake, the nation that controls the standards, the preferred chips and satellite technology will be the world largest economy for the next century. Now technology transfers to China take on a whole new importance.
To get ahead in 5G the Trump administration has mentioned the idea of changing the FCC’s current model of selling spectrum at auction to the highest bidder to a wholesale model that would encourage more innovation and more competition, leading to greater innovation and dominance over China. In China a handful of state run telecoms are financed by the Chinese government, limiting competition and stifling innovation. When these telecoms want to innovate they buy it through acquisitions, or simply acquire the technology through a transfer from some company that wants to do business in China. At the most devious are the illegal transfers that take place as foreign companies are required to partner with Chinese companies in order to do business in China. Partnering seems like a nice way of saying, “work closely with me so I can learn your business and acquire your technology”.
In a June 2018 meeting of the Office of Science and Technology Policy members of the FAA, FCC, CTIA, Department of Defense and the satellite industry gathered to discuss the topic of sharing spectrum; sharing, not auctioning. Commerce Secretary Wilbur Ross discussed the importance of U.S leadership in 5G in his opening remarks. Kelsey Guyselman, the White House policy advisor for the Office of Science and Technology Policy (OSTP) stated that “sharing” spectrum could be the best way to introduce the next generation of mobile technology and hinted that a wholesale model would be preferable to an auctioning of spectrum.
The message is clear from many different camps, lead on 5G, or fall behind the world; the Chinese.
Huawei, the Chinese multinational networking, telecommunications equipment and services company headquartered in Shenzhen, Guangdong is the world’s sixth largest information technology company by revenue. The Financial Times reported in a June 26 article that Huawei is the biggest corporate sponsor of overseas trips for Australian politicians. This comes just weeks ahead of a decision about whether Huawei and other Chinese telecoms will be granted contracts to supply Australia’s next generation mobile network. Recently Altice partnered with Huawei to build out 5G networks in Portugal. China’s ramp up of 5G is accelerating and suppliers of 5G equipment are expected to begin deliveries as soon as early 2019. With the Federal government blocking China mobile from offering services to U.S citizens and intelligence agencies cautioning U.S. citizens from buying Huawei smart phones because they can be used to spy on and collect personal information, clearly 5G and Chinese ambitions to lead in this market are front and center priorities for the Trump administration.
The Trade War Will Be Short Lived
Right now I think somewhere around the November elections we’ll see the trade war take a pivot and go off in a more harmless direction. This will not be the end, just a pivot that the stock markets around the world will like. There will be lingering trade conflicts, but the bulk of this trade war I think will end soon. As Trump must have learned from Sun Tzu’s The Art of War, “There is no instance of a country having benefited from prolonged warfare”. Sun Tzu advocated to attack and win quickly so as to avoid wearing out your army.
Conclusion
“All warfare is based on deception”. This trade war is not about balanced and free trade, it’s about 5G and making sure the U.S leads in 5G and all the related technologies sited above. This trade war is about not repeating mistakes of the past. When all the hands are played I think the U.S. wins this trade war by achieving the goals I set out above. China’s Belt and Road Initiative may in fact bring China to economic ruin as easily as economic power; either condition will be bad for the U.S economy.
To fight this trade war the U.S. needed a way to slow China down. The trade war is a distraction designed to embroil China in costly delays and to provide access by U.S. ‘observers’ into Chinese technology companies. While some trade concessions will inevitably be won and be valuable, the real battle is for global leadership in high speed mobile communications, AI and machine learning.
In order to carry out a trade war the U.S needs to feel good about itself economically. Specifically U.S corporations that will be impacted by tariffs in a trade war. The tax cuts were created not just to fuel the economy but also to arm American companies with cash to hire workers, invest in capital expenditures and grow while the trade war is waged. At the same time China will face mounting debt burdens and have to change up their plans. The U.S. has seen unprecedented hiring with jobless claims at an all-time low. At the same time China has issued the largest amount of debt in its history and plans to increase its debt by 50% over the next 10 years to fund the Belt and Road Initiative. China is becoming a very big debtor and may replace the U.S. as the largest debtor nation in history. However, they’ll be doing so with a stock market and a banking system that is nowhere near as strong or resilient as the U.S. banking system.
The U.S. outspent the Soviet Union on defense and arguably accelerated the breakup of the USSR. That’s overly simplistic but we basically were able to outspend them on defense. The U.S may be able to do the same thing with China with respect to technology. The tax cuts also put a little extra cash in people’s pockets which helps to offset any additional burden created by the trade war, but it’s the hiring that provided the most benefit. Remember, someone who is employed is now a tax payer, someone who is unemployed is a tax receiver. When every economic action since 2016 is viewed in isolation one can only come to the conclusion that chaos is rampant. I think when viewed through a different lens we get a very different picture of this administrations actions. However important the economics of the trade war are to the future of the U.S. there are glaring problems. However much I try to weave all the actions of this administration into a cohesive story, I fail.
There are significant, troubling things happening within the Trump administration that I can’t resolve, understand or make any sense of. Immigration is a disaster that must be fixed or we will not only suffer the admonishment of the world, but will suffer a brain drain and worker drain that will cause us to lose this amazing opportunity that we have to lead for the next century. When the goal is to grow the whole pie for everyone why exclude so many from participation when we desperately need their labor and intellectual inputs? To stop illegal immigration is simply a matter of fixing the system by which we process people who wish to enter our country. But to fix the system will require technology. Oddly, the very companies who can do the most to help have pulled away from contracts with the U.S. Immigration Service and ICE because of national retaliation against them for being connected with the family separations. If better systems had been in place, and a more thoughtful, long term plan been communicated well, there would have been no need to separate families, but in light of the current situation, reuniting families would have been easier and faster.
The callousness, the hatred, the bigotry, I can’t condone or in any way understand any of these things. I could scream back at the hatred like so many I know on Facebook and Twitter, places where hate against what they hate is so rampant I’ve had to turn away. What we think, we create. What we fight against we create more of. If we want love in the world, think about and promote love. If we want prosperity for all, think about and promote prosperity. If one wishes to exacerbate wealth inequality than that person should scream and yell at the rich and focus all their attention on the wealth gap. I’m confident that the most successful people in the world from Mother Teresa to Nelsen Mandela to Jeff Bezos never focused their attention on what they didn’t want.
Ultimately I trust our laws, our courts and the amazing spirit and will of the American people to do the right thing. Somehow, throughout our nation’s history, we always manage to find our way back to doing what’s right. As a nation we have made major mistakes in our past and we will make many more in our future, but overall this will always be the greatest place on earth to live, to start a business and to raise a family.
As to my inability to weave all of the Trump administrations actions into my theory on the trade war, I simply ask forgiveness from my readers. I have no way to bring all of those other factors into this complex story. What I fear most, is that there is no connection.
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Bond prices will decline as a result of rising rates and a Dollar Shortage.
Invest in China stocks. NetEase, YY, JD, Baidu, Alibaba, mobile phone services and makers, and China BioTech
Invest in Whirlpool (see Whirlpool caveats above), Kohl’s, Costco Wholesale, Home Depot, Dollar General and Casey’s, Ingersoll-Rand, Illinois Tool works, Paccar, Honeywell, and DowDupont, PayPal, Square, Goldman Sachs, Citibank, Bank of America, JP Morgan, DBC, Apple, Microsoft and Caterpillar.
Goldman Sachs slides to around $210/share
Proctor & Gamble, Coca-Cola, Merck and Pfizer will go lower as rates rise.
The Chinese yuan will replace the dollar in international trade. Not this year, but it will happen in coming years.
The DOW will close the year with 9-10% gain.
The S&P 500 will close the year at 2900-3000.
The portfolio will generate about $2,065 in dividends.
M&A of drug companies will increase over the next 24 months.
The trade war will be short lived, some pivot will take place prior to November 2018 elections
Stay Invested,
Clay Baker
Disclosure: I am personally invested long in some or all of these funds that appear in the Mother's Little Helper portfolio or manage these investments for my Mother's portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks and funds that do not appear in the MLH portfolio but may be mentioned or related to this article. It is not my intention to advise or encourage the purchase or sale of any security. Since I may on occasion discuss Bitcoin and other cryto currencies I disclose here that I personally own investments in the cryto-currencies listed here: AMZN, DBC, VTI, VWO, VEA, VIG, XLE, MUB, TBT, GLD, Bitcoin, LiteCoin
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.
